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Azerbaijan Eyeing Gas Opportunity In Europe

Azerbaijan is running lower on energy income but, amidst a revived push for a role in gas distribution in Europe, not on energy-ambitions.

Baku is pushing for the European Union’s seal of approval on the planned takeover of Greece’s gas distribution grid by Azerbaijan’s state oil and gas corporation, SOCAR. Energy Minister Natiq Aliyev expressed dismay that EU-regulators are taking their time to make sure the deal is compatible with EU competition laws,EurActiv reported on March 11.

The deadline for the decision already was extended to April 22, but the minister’s patience is running thin nonetheless, as SOCAR’s tax contributions begin to slim down.

Tax payments for February from the country’s cash cow dropped to some 108 million manats ($103.23 million), an 8.6 percent-decline from January, Azerbaijani news outlets reported.

That’s the effect of both slumping oil and gas prices, and a currency devaluation. The manat now can buy less for Azerbaijan than it could last month before losing more than a third of its value against the dollar and 30 percent against the euro. (Promoted within Azerbaijan as a patriotic symbol, it currently trades at 1.05 to the dollar and 1.11 to the euro).

Arguably, SOCAR’s longstanding plans to run gas-distribution networks in Europe could shore up some of that revenue slack for Azerbaijan. As one local outlet put it, the country plans to “control” what gas it sends to European markets. In 2013, SOCAR paid 400-million euros (based on current rates, some $423 million) for two-thirds of Greece’s gas-distributor DESFA, and has its sights on Eastern Europe as well. Albania appears to be one of the first places where Azerbaijan hopes to get busy.

The EU, however, has concerns that Azerbaijan may get too much of that “control” as both a supplier and distributor of natural gas. Azerbaijan is set to become an important gas supplier to Europe through the Trans-Anatolian Natural Gas Pipeline, which will feed gas to Greece, Albania and Italy, and, via a link with Greece, to Bulgaria. SOCAR owns a 20-percent stake in the conduit, on which construction is slotted to begin this year, but Energy Minister Aliyev sees no conflict of interest with the company’s DESFA holding.

Rather, Baku has claimed that Greece, struggling with a severe economic crisis, and energy-thirsty Europe need Azerbaijan more than Azerbaijan needs them. Yet its anxiety over the DESFA-decision suggests a slightly different tale.

Blackbird Energy: Buy The Rumor, Sell The News

Summary

Blackbird Energy is an emerging explorer targeting the Montney formation in Canada.

Thanks to its first two Montney wells, the company garnered increased attention over the last months.

Hype and speculation pushed the company’s valuation to sky high levels.

The drilling results were released just a few days ago disappointing the investors who dumped the stock and hit the exits.

(Editor’s Note: Investors should be mindful of the risks of transaction in securities with limited liquidity, such as BKBEF. Blackbird Energy’s listing in Canada, BBI.V, offers stronger liquidity.)

Introduction

There is an old Wall Street proverb saying “buy the rumor, sell the news” when stocks trade up into “big” announcements and carry an inflated valuation, but sell off shortly thereafter, because short-term traders bail and speculators sell as well.

And, this is the case with Blackbird Energy (OTC:BKBEF), as illustrated below:

History repeats itself of course and I saw the same pattern just a few months ago. Petromanas Energy (OTCPK:PENYF) was drilling a high-impact well (Molisht-1) in Albania in H1 2014, and the expectations were very high. The investors set high expectations because several bullish reports were sayingthat “Shell needs Petromanas’ big play”, “in Albania, the geology is similar to southern Italy, home to some of Europe’s largest onshore fields that host between 300 million and 500 million barrel” and “Shell needs multi-hundred million barrel discoveries to move the needle and clearly Shell thinks it has a good chance of finding something like that in Albania”.

As a result, Petromanas’ market cap skyrocketed reaching almost C$280 million in June 2014, although Petromanas was an explorer with zero commercial production back then.

Shell (NYSE:RDS.A), Petromanas’ JV partner, encountered several challenges during the drilling process that finally made it suspend the well in H2 2014. And, Petromanas’ performance between H1 and H2 2014 is illustrated below:

The Assets

Blackbird Energy is an emerging Canadian explorer whose core property (Elmworth project) is located in the Montney fairway in Alberta, as illustrated below:

Blackbird was created in its current form in early 2014 through the acquisition of Pennant Energy. As shown above, Shell , Apache (NYSE:APA), Canadian Natural Resources (NYSE:CNQ), Encana (NYSE:ECA), NuVista Energy (OTC:NUVSF), Chinook Energy (OTC:CNKEF), Birchcliff Energy (OTCPK:BIREF) and privately-held Canadian International Oil own significant acreage in the same area, which could made Blackbird a potential takeover target in case Blackbird’s acreage contained hydrocarbons in commercially viable quantities.

The Business Plan, The Articles And The First Results

Since the completion of the merger, the new entity has changed its business plan and has decided to focus on the Montney formation. Therefore, Blackbird plans to grow through the drill bit with the hope to become a junior Montney producer over the next months. Blackbird believes that its properties carry superior economics thanks to their high liquids/gas ratio. Actually, Blackbird estimates that its wells contain between 100 and 200 bbls/mmcf, as illustrated below:

Back in October 2014, the company completed two financings at a price of C$0.29 per special warrant and C$0.34 per Flow-Through share for total gross proceeds of approximately C$30.4 million.

That was also the time when the company announced a high impact multi-well drill program targeting both the Upper and Middle Montney. The first well would target the Middle Montney at Elmworth on or before November 1, 2014. The second high impact well would target the Upper Montney interval and would be drilled from the same drill pad as the Middle Montney well.

In December 2014, the company completed another private placement. The aggregate amount of shares issued pursuant to both tranches of that private placement was 16,150,555 at a price of C$0.45 per flow-through share for aggregate gross proceeds of C$7.27 million.

Meanwhile, the first article about Blackbird was syndicated in May 2014. That article was followed by two articles in September 2014, one article in October 2014, two articles in January 2015 and two articles in February 2015. Actually, these are the articles I found while I was doing my due diligence on Blackbird, but I might have missed some of them.

The last seven articles were touting the company’s Montney acreage while one of them claimed that Blackbird could exit 2015 with a production between 5,000 boepd and 7,300 boepd. And, Blackbird was fully aware of these seven articles. Actually, the company was a client of the three websites that published these seven articles between September 2014 and February 2015, according to the disclosures below:

“Blackbird Energy Inc. paid The Energy Report to conduct, produce and distribute the interview. Garth Braun had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Garth Braun and not of The Energy Report or its officers”.

and below:

“Legal Disclaimer/Disclosure: Blackbird Energy is an Oilprice.com client. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment”.

and below:

“Blackbird Energy Inc. paid Streetwise Reports to conduct, produce and distribute the interview”.

As usual, speculation and hype made the investors pile into the stock, pushing it at sky high levels in February 2015. The stock went from C$0.20 to C$0.49 in just two months, and the company’s market cap skyrocketed reaching C$173 million (based on approximately 354 million basic outstanding shares pro forma the latest placement).

The disappointing drilling results from the first two Montney wells were released last week and the stock plunged. According to these results:

1) The first well flowed at a rate of approximately 407 boepd (44% liquids), including 1.36 mmcf/d of natural gas, 133 bbls/d of 50 degree API condensate and an estimated 47 bbls/d of plant recoverable natural gas liquids, for a total liquids to gas ratio of 133 bbls/mmcf.

2) The second well flowed at a rate of approximately 466 boepd (67% liquids), including 0.9 mmcf/d of natural gas, 281 bbls/d of 46 degree API condensate and an estimated 32 bbls/d of plant recoverable natural gas liquids for a total liquids to gas ratio of 341 bbls/mmcf.

From an operational perspective, further testing is planned following spring break-up to help evaluate the wells’ potential. From a fundamental perspective, Blackbird currently holds approximately C$27 million in cash post drill and complete of these two Montney wells, and has zero debt.

A debt-free energy company is always a very good starting point, given that debt overhangs affect several energy companies these days pushing them to the verge of bankruptcy. And, I presented some of these companies in my previous articles here and here.

On the flip side, there are two key disadvantages with the Blackbird story:

1) At the current price of C$0.31 per share, the market cap is C$110 million and the enterprise value is C$83 million or US$67 million (1 USD=1.25 CAD). To me, this remains a rich valuation for an explorer with uncharted land and two disappointing drilling results.

2) Blackbird’s Montney wells are expensive and therefore, Blackbird has little or no margin for error. Over the next months, it has to be very careful not to make mistakes while deploying its remaining limited capital to the Montney play, given that the D&C cost per well is approximately US$10 million, as illustrated below:

My Takeaway

Blackbird Energy is an emerging explorer that started to de-risk the Upper, Middle and Lower Montney in Canada in late 2014. That was the time when several articles added a lot of excitement to the Blackbird story and the stock price took off reaching C$0.49.

However, the drilling results from the first two Montney wells were disappointing, and many investors dumped their shares last week bringing the company’s enterprise value at US$67 million (1 USD = 1.25 CAD) at the current price of C$0.31.

To me, this is still a very rich valuation despite the 40% correction. I am saying this because I see the big picture in the sector with the help of the relative valuation models. And, the recent slump in the oil price has brought some quality energy producers with zero net debt at absurdly low valuations, while Blackbird Energy remains a speculative-grade explorer that has still a lot of work to do in order to de-risk its assets during the remainder of 2015.

Therefore, I am not willing to pay US$67 million for a risky explorer, when I can buy with the same amount of money proven producers with a rock solid balance sheet.

For instance, Petroamerica Oil (OTCPK:PTAXF) is an established producer of 5,500 boepd (98% oil) with a pristine balance sheet while also being a potential takeover target, as presented in one of my recent articles. But, the turmoil in the energy sector punished the Innocent along with the Guilty bringing Petroamerica’s enterprise value at US$75 million (1 USD = 1.25 CAD) at the current price of C$0.14.

Alternatively, if some investors are thrilled by the idea of owning shares in an explorer, they need to check Petrodorado (OTC:PTRDF) whose market cap is only US$5.8 million (1 USD = 1.25 CAD) at the current price of C$0.15, although Petrodorado has US$17.5 million in cash with no debt and extensive acreage right next to producing oil fields in Colombia, as presented in my Instablog article.

In other words, my investment motto is to get more for less. Paying more to get less is not for me. Therefore, I am not going to touch Blackbird at the current levels because I have way better investment choices from the energy sector. I will stay on the sidelines and I will continue watching how the Blackbird story will unfold over the next months.

TANAP gas pipeline project sees shareholding deal with BP soon

Pipeline (TANAP) project expects BP to resolve outstanding issues soon to become a stakeholder in the multi-billion dollar project that aims to reduce Europe’s reliance on Russian gas, a TANAP official said on Wednesday.

Magsud Mammad, the TANAP external relations director, told Reuters on the sidelines of an energy summit in Montenegro’s coastal resort of Budva that talks with BP, which said in 2013 it wanted a 12 percent stake in the project, were ongoing.

“The agreement is still pending,” Mammad said. “It is all about technical problems which should be resolved soon. We have certain technical differences but I don’t think there’s going to be a pull out by BP,” he said.

Azeri firm SOCAR holds a 58 percent stake in TANAP while Turkish pipeline firm Botas raised its stake to 30 percent from 20 percent in 2014.

TANAP envisages carrying 16 billion cubic metres (bcm) of gas a year from Azerbaijan’s Shah Deniz II field in the Caspian Sea, one of the world’s largest gas fields, which is being developed by a BP-led consortium.

The pipeline will run from the Turkish-Georgian border to Turkey’s border with Bulgaria and Greece. The preliminary cost of the pipeline has been estimated at $10-$11 billion.

Mammad said the project would be inaugurated on March 17, while its construction would start in April. It is expected to be completed by the end of 2018 in order to start deliveries of gas from Shah Deniz II to Europe in 2019.

The Balkan states hope to benefit from the TANAP project, which could connect to the Trans-Adriatic Pipeline (TAP) that will bring gas to Europe via Italy, through Albania.

Croatia, Montenegro and Bosnia joined Albania in backing TAP because they want to build the Ionian-Adriatic Pipeline (IAP) from TAP’s landing point in Albania to supply them with gas as they mainly rely on Russian imports. Montenegro and Albania are not connected to a gas grid.

“There is a political will and we need to gather investors and pursue the project in parallel with TANAP,” Montenegro’s Economy Minister Vladimir Kavaric said in Budva. The cost to build the link was put at around 700 million euros, he added.

Croatians ‘sleep-walking’ into destroying tourism with Adriatic energy industry

An ancient walled city on a sparkling sea, surrounded by beaches and backed by the Dinaric Alps, Budva in Montenegro is one of dozens of Venetian-influenced towns along the Adriatic coast and the centrepiece of a tourism boom.

Holidaymakers are drawn by Croatian islands such as Hvar, favoured by yachters, and Pag, popular with partygoers and foodies alike, as well as the famous city of Dubrovnik, known as the “Pearl of the Adriatic”. However, concerns are rising that this could all be jeopardised by the growth of the oil and gas industry.

Amid growing opposition to offshore development in one of Europe’s top travel destinations, a conference promoting Adriatic oil and gas exploration is being held in Budva on Tuesday. Government ministers, energy industry executives and financiers will discuss “key legal issues surrounding oil and gas exploration”.

The keynote speaker is Cherie Booth, wife of the former prime minister Tony Blair, in her capacity as chair of Omnia Strategy, a law firm she set up to “provide strategic counsel to governments”, including those of Gabon and Kazakhstan.

Supporters say offshore oil and gas in the Adriatic could help Europe reduce its reliance on Russian energy imports. Opponents warn that exploration will damage tourism and could have grave environmental consequences. Under mounting pressure, the prime minister of neighbouring Croatia, Zoran Milanović, has proposed a referendum on exploration.

Paul Bradbury, who runs tourism websites from Hvar, said “Oil and gas is tourism suicide. Croatians are sleep-walking into this irreversible path without a proper public-awareness campaign. Hvar is the sunniest island in Europe, but it is also reliant on its pristine seas.”

Croatia, the EU’s newest member, launched its first tender for offshore oil and gas blocks last year. This was beginning of a process that it hopes will bring in $2.5bn (£1.7bn) of investment over five years to an economy that has barely grown since 2008.

The tender applied to an area of 14,000 sq miles (36,823 sq km) from the Istrian peninsula – billed as “the new Tuscany” – to near the mouth of Montenegro’s Bay of Kotor, a mountain-fringed gulf dotted with attractive limestone villages.

The first licences are due to be awarded next month, with the remaining blocks going to a second tender in September.

Montenegro has held a similar tender for offshore oil and gas exploration blocks covering 1,200 sq miles, and announced in February that it had started initial negotiations with bidders. To the south, Albania has been undertaking seismic studies of offshore resources, and companies including Shell are already active onshore.

Critics say that the benefits of oil and gas development are outweighed by the potential risks to the environment and the tourism sector. Exploration would be allowed up to about six miles (10km) from the mainland and four miles from the islands.

“This is contradictory to 20 years of work on the tourism industry and could kill Croatia’s whole brand,” said Tanja Gutenmorgen, a member of the Clean Adriatic Sea Alliance (CASA), an anti-drilling activist group, and the owner of a high-end tourism business.

“People come because of pristine untouched nature. Nobody wants to bathe in a sea where they see oil rigs, platforms, tankers and pipelines, or see the onshore infrastructure. We all have villas and apartments that we offer to tourists for the view of the sea. This is like putting an elephant in a tiny shop full of filigree. We will fight it until our last breath.”

Vjeran Piršić, a local councillor on the island of Krk and head of an environmental organisation, told the Guardian that he feared an oil spill worse than the Deepwater Horizon disaster in the Gulf of Mexico in 2010. He and CASA claim that currents in the Adriatic mean a spill off the eastern shore would be pushed northwards towards Venice, permanently damaging the pebbly beaches along the coastline.

Piršić said: “This is a question of human life, and also the economy, which is dependent on tourism and fishing. Local communities are now mobilising.”

CASA, which advocates replacing fossil fuels with renewable energy, says oil extraction could earn Croatia as little as $400m, a figure dwarfed by annual tourism revenues, which reached $9.5bn last year from 11 million holidaymakers, according to the UN World Tourism Organisation. This claim is strongly rebutted by the Croatian Hydrocarbons Agency, which says its conservative estimate of oil and gas revenues is $1bn a year.

Croatia’s tourism industry was devastated by the country’s 1991-95 war, but has been painstakingly rebuilt over the past two decades. Visitor numbers only returned to pre-war levels in 2012. Montenegro has one of the world’s fastest-growing tourism sectors, according to the World Tourism and Travel Council, and is increasingly popular with Europe’s glitterati and Russians buying second homes.

The billionare financier Nat Rothschild held his 40th birthday in Porto Montenegro, a glitzy resort on the Bay of Kotor in which he is an investor, with guests including Peter Mandelson and Roman Abramovich.

Barbara Dorić, the head of the Croatian Hydrocarbons Agency, which is running the exploration tenders, told the Guardian that tourism in Croatia had co-existed with the oil and gas sectors in Croatia for 40 years, and Italy had more than 140 gas platforms and oil rigs in its Adriatic waters. She added that environmental protection standards had to meet stringent EU directives.

Dorić said: “We insisted on the strictest criteria for the preservation of the environment. Tourism is the most important industry in our country, which cannot and will not be endangered with this project.”

Sources close to the process insisted that few oil rigs would be visible from the coast, and gas fields were attracting more attention.

Some in the tourism sector are less pessimistic than CASA about hydrocarbons development. Tihomir Nikolas, head of a major tourist association, said he was not opposed to new explorations but wanted more thorough consultation, monitoring and management.

“Certainly, we are concerned about any potential risk of contamination in the Adriatic,” said Boris Šuljić, owner of a boutique hotel on Pag. “But all indications are that there will in fact be gas exploration in the Adriatic, which is less risky then oil exploration. We believe that the highest standards of environmental protection will be applied.

“The Adriatic is one of the cleanest and most beautiful seas in the world and I am sure that our government and citizens will make the best decisions in order for it to remain that way.”

Despite this, Milanović – who faces a re-election battle this year – appeared to back down last week in the face of mounting opposition to exploration, calling for a referendum “to see if we want to exploit minerals and raw materials”.

Luka Orešković, co-chair of the Emerging Europe business and government group at Harvard University, and a Zagreb political insider, said: “Milanović sees quick benefits of a populist measure particularly for parts of the electorate that rely on tourism for their livelihood.

“The opposition to the oil and gas process is extremely insubstantial in terms of actual arguments, but two years after the tenders were announced, it’s become a key issue. If it goes to a referendum, it’s a question of how it is phrased, but it could be the end, as popular sentiment has turned very much against.”

Meanwhile, Booth’s role is coming under scrutiny. In a statement issued to the Guardian on Friday, CASA said it could not “comment on what relevance the former prime minister’s wife role as an advocate and lobbyist might mean to the Adriatic”.

But it added: “We suspect, based upon her previous actions, it won’t be in the common interest of the population, the natural heritage, fisheries or tourism industries.”

Asked by the Guardian if Booth was aware of the growing controversy over Adriatic oil exploration, Omnia Strategy said in a statement: “Mrs Blair will stress the importance of implementing international best practices to efficiently address key social and environment challenges.”

Southern Gas Corridor, response to EU energy security challenges

The Southern Gas Corridor should be steered at the highest political level in Europe and Belgium, in addition to Azerbaijan.

Marc Verwilghen, the former Belgian energy minister and director at the TEAS Brussels Office, made the remark at the Azerbaijan–Belgium: Co-operation in Energy and Beyond international conference – jointly organized by leading Belgian energy infrastructure specialist Fluxys and The European Azerbaijan Society.

More than 120 specially invited diplomats, ministers, Belgian politicians and businesspeople attended the event held on March 10, according to the TEAS.

“The creation of a pipeline system carrying Azerbaijani hydrocarbon resources to Europe, via Turkey, began a decade ago, breaking the Russian monopoly over the exporting of Caspian energy resources and providing Europe with an important source of diversification,” said Verwilghen further noting that the importance of this strategy cannot be underestimated.

Addressing the event, Natig Aliyev, the Azerbaijani energy minister stressed that such successful EU–Azerbaijani energy projects as the Baku–Tbilisi–Ceyhan oil and Baku–Tbilisi– Erzurum gas pipelines have already demonstrated the role of Azerbaijan in ensuring energy security

“The joint EU–Azerbaijani declaration on the Southern Gas Corridor was signed in Baku in 2011, recognizing Azerbaijan as a substantial contributor to and enabler of the Corridor, with a significant role in providing a new source of gas to Europe,” he said.

The 3,500-kilometer South Gas Corridor that would finally end Europe’s dependence on a single pipeline started with the go-ahead to the South Caucasus Pipeline Expansion, which will connect the Sangachal terminal with eastern Turkey through Georgia. It will link up with the SOCAR-led TANAP to be connected with a third pipeline TAP on the Turkish-Greek border.

Aliyev went on to say the EU, many financial institutions and all partners have reconfirmed their commitment to the Southern Gas Corridor. “The project requires the drilling of 26 subsea wells, construction of a new refinery in Sanganchal and development of the SPCX to increase its capacity. Around 25 percent of the Southern Corridor is completed and first gas will come to Europe by 2020,” he added.

Didier Reynders, the Belgian deputy prime minister and foreign minister, continued that this massive project will bring Azerbaijani gas to European markets, and change the energy landscape across the continent.

“Fluxys is collaborating very closely with the Azerbaijani state energy company SOCAR. Fluxys is now offering its gas transit services to its Greek counterpart, DESFA, so its role in this essential project will further increase,” he said.

Azerbaijani hydrocarbon developments will impact European energy security, including that of Belgium, said Stephen Gallogly, Head of Europe, Middle East and Africa Division at the International Energy Agency.

“It is now the turn of natural gas to add another success to Azerbaijan’s energy development. The Southern Gas Corridor will help diversify sources of energy for Europe, away from Russian dominance. Azerbaijan’s contribution to the Southern Gas Corridor is essential.

“By 2020, coal-fired power stations will be decommissioned across Europe, as will most nuclear power stations. There will be a greater requirement for gas imports, and the Southern Gas Corridor is designed to potentially carry gas from Eastern Europe, the Mediterranean, Central Asia, Iraq and Iran, amongst other countries,” he said noting that however the first gas will be the very Azerbaijani.

Fluxys CEO Walter Peeraer, in turn, emphasized that the Azerbaijani gas will be the new complementary source for Europe.

“I appreciate the current and future potential of Azerbaijan in ensuring the energy security of Europe. Our partnership in TAP is for the long-term, and a transmission operator we are sharing our expertise and bringing value to the project,” he noted.

The approximately 870 km long TAP will connect with the Trans Anatolian Pipeline near the Turkish-Greek border at Kipoi, cross Greece and Albania and the Adriatic Sea, before coming ashore in Southern Italy.

TANAP construction is due to be completed in 2018 and TAP in 2020 with first gas deliveries to Europe planned in the same year. The cost of the work on all four elements of the Southern Gas Corridor was estimated at almost $55-48 billion, according to the preliminary data.